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FRA Assignment MY
FRA Assignment MY
INDIVIUAL ANALYSIS
AMR’s liquidity is very low as the ideal is 2 so this company not even have assets equal to their
liabilities. And company owes about 2.32 times to their creditors. There times interest ratio is
higher that means they are not facing risk related to their ability to make their contractual
payments and they are fully able to fulfill their interest obligations. There ROA AND ROE is
very favorable. ROE is much higher than ROA partly because of extreme leverage. Because of
good profitability, all companies seem to be in a good position to pay interest expenses, despite
high debt-to-equity ratios.
DELTA also appear to be in poor liquidity position as company not even have assets equal to
their liabilities.. DELTA show an excess of creditor financing in their capital structure. Their
ROA AND ROE is very favorable. There times interest ratio is higher (9.3) that means they are
not facing risk related to their ability to make their contractual payments and they are fully able
to fulfill their interest obligations. ROE is much higher than ROA partly because of extreme
leverage. DELTA reveals higher than usual liquidity and solvency risk. Although the high
profitability appears to mitigate these risks to a large extent.
UAL appears to be in poor liquidity position. Although the high profitability appears to
mitigate these risks to a large extent. Their ROA AND ROE is very favorable. ROE is much
higher than ROA partly because of extreme leverage. It reveal higher than usual liquidity and
solvency risk.
INTER-GROUP ANALYSIS
All three companies appear to be in poor liquidity position. UAL’s liquidity is especially
troubling as compare to other two. From a balance sheet perspective, all companies show an
excess of creditor financing in their capital structure. Once again, UAL is the most
worrisome with total debt (also in long-term debt) at 4.66 (2.93) times equity.
All three companies are profitable. The ROA is respectable and the ROE is extremely good
(especially of UAL and DELTA) ROE is much higher than ROA partly because of extreme
leverage. Because of good profitability, all companies seem to be in a good position to pay
interest expenses, despite high debt-to-equity ratios.
Overall, the three companies (in particular UAL) reveal higher than usual liquidity and
solvency risk. But the high profitability of these companies appears to mitigate these risks to
a large extent.
C- Because airline industry is included in volatile industries. They face volatility and
fluctuations in earnings because airline travel is somehow expensive and depends on
economy’s performance. So in this case there is high volatility and risks because of demand
fluctuations, cost structure and competitive pricing. Airline industries face high fixed cost as
compared to variable costs and prices are high because of cost structure they tend to reduce
fares having low profit margins to increase market shares during conditions of low demand.
Because of risky environment airline companies often find it difficult to raise debt at
reasonable terms. And equity financing is possible but also very expensive in airline
industries because of high cost structure. Consequently, leasing offers a convenient
alternative to financing the high capital investment requirements of this industry. Other
benefits of lease financing to airline industries includes less initial cash investment
requirement and avoidance of technological obsolescence.
D- All three companies are increasingly structuring their leases to be operating leases. The
outstanding MLP on operating leases for AMR, Delta and UAL is approximately $17 billion,
$15 billion and $24 billion, respectively, compared to $2.7 billion, $0.4 billion and $3.4
billion for capital leases. The lease classification appears arbitrary. The capital and operating
leases do not seem to differ either on the basis of the type of asset leased or the length of the
lease. The average remaining life on the operating leases, for all three companies, varies
between 16 to 20 years, which is much more than those on capital leases (see part e below).
Overall, there does not seem to be any logic underlying the lease classification, except that
the companies have structured the leases to avail themselves of the benefits of operating lease
accounting.